A Market Update – November 2023
by Mario Toneguzzi, Connect4Commerce contributor
While Calgary’s commercial office real estate market has continued to be challenged in the past few years since the outbreak of the pandemic, the industrial side of the real estate market remains strong.
A report by commercial real estate firm JLL says companies from Vancouver and Toronto continue to expand into the Calgary and the Greater Calgary Area market to capitalize on favorable rents and location in comparison to the other major Canadian cities.
“Furthermore, as commercial driver regulations limit drive time to 13 hours in a 24-hour period, many companies have chosen Calgary to serve as their distribution hub to service other major Canadian cities such as Vancouver, Edmonton, and Winnipeg within the same day drive time requirement. This positions Calgary well for continued future growth,” according to JLL’s Q3 market report.
Calgary’s Industrial Market
In the third quarter of this year, Calgary’s industrial vacancy rate trended upwards slightly to two per cent with more than one million square feet of new construction delivered this quarter.
JLL says pre-leasing activity remains strong and is expected to increase for the rest of this year as forecasts indicate there will be an additional 2.8 million square feet completed in Q4, of which 1.3 million square feet or 46 per cent is slated to be pre-leased.
“As a result, this forecast estimates total annual net absorption (the sum of square feet that became physically occupied, minus the sum of square feet that became physically vacant during the year) to be in the 3.5 million square feet range at the end of Q4 which is in line with the historical average of 3.45 million square feet. This will place upward pressure on vacancy rates due to the amount of new forecasted construction being delivered.
It is also noted that Balzac, in Rocky View County, represents 59 per cent of new product delivered this quarter and represents 44 per cent of new product currently under construction,” says JLL
“While Calgary is trending towards a balanced market, which is estimated to be between four per cent to five per cent, it remains healthy and is well positioned for further growth. Taking a more granular look into the market, it was noted that of the 3.4 million vacant square feet on the market, 24 per cent of the vacant space is over 100,000 square feet, 37 per cent was between 25,000 square feet to 100,000 square feet and 40 per cent of the vacant space is below 25,000 square feet.”
“While Calgary is trending towards a balanced market, which is estimated to be between four per cent to five per cent, it remains healthy and is well positioned for further growth. Taking a more granular look into the market, it was noted that of the 3.4 million vacant square feet on the market, 24 per cent of the vacant space is over 100,000 square feet, 37 per cent was between 25,000 square feet to 100,000 square feet and 40 per cent of the vacant space is below 25,000 square feet.”
Industrial Lease Costs in Calgary
JLL said the average asking net rental rates in Q3 rose to $10.89 per square foot, an increase of $0.12 per square foot, or 1.1 per cent in comparison to last quarter and an increase of $0.39 per square foot or 3.7 per cent year-over-year.
“Annual rate escalations have become a common expectation by landlords as demonstrated by the majority of recent lease transactions. Regardless of the rapid rise in interest rates, demand for owner/user sales remains high as there is very limited inventory available on the market. Interest rates have not had a material impact on activity in the market for owner user sales to date as the market remains tight,” says the report.
Calgary’s Office Market
Meanwhile, Calgary’s downtown office market saw availability decrease from 28.2 per cent to 27.6 per cent in the third quarter. JLL says the downtown has seen more tenants willing to take on additional floors to control their future requirements, even if it means putting unoccupied space on the sublease market in the short term. This is driven by the active unprecedented growth due to mergers and acquisitions and industry recovery.
Calgary Office Lease Rates
Direct asking gross rent in the downtown is up slightly with an average of $33.24 per square foot.
Overall suburban office availability decreased 92 basis points to a total of 20.1 per cent in the third quarter. Direct asking gross rent, which remained flat, averaged $31.20 per square foot.
Looking Ahead to 2024
“Calgary’s vibrancy throughout downtown is expected to continue as residential conversions continue to be announced thus reducing vacant inventory and creating an inward pressure of tenants into the Central Core. Return-to-office continued to be strong throughout downtown as retailers are extending their hours throughout the Plus 15 and along ground level,” says JLL.
“As assets continue to trade hands and large corporate occupiers undergo review of their current and future real estate needs, economic trends will largely influence real estate decisions. The rising price of oil will allow for more merger and acquisition activity, with important implications for office occupancy footprints.”
(Mario Toneguzzi is a regular contributor to the Connect4Commerce Canadian Small Business News Blog. Mario is a veteran of the media industry for more than 40 years and named in 2021 a Top Ten Business Journalist in the world and the only Canadian to be named.)
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